Podcast Summary: Money Guy Show – Episode: "401(k) Mistakes That Could Cost You Millions"

Release Date: March 7, 2025

Hosts: Brian Preston and Bo Hanson
Podcast Title: Money Guy Show
Description: Bringing confidence to your wealth-building journey with simplified strategies. Learn financial tactics that transcend common sense to help achieve your money goals faster, allowing your assets to work for you so you can live a more fulfilled life.

Introduction

In the episode titled "401(k) Mistakes That Could Cost You Millions," hosts Brian Preston and Bo Hanson delve into the common pitfalls individuals encounter with their 401(k) retirement plans. They emphasize the significant financial consequences these mistakes can have over time and offer actionable advice to avoid them.

Mistake #1: Not Contributing or Participating in a 401(k)

Overview:
Many individuals overlook the importance of contributing to their 401(k) plans, thereby missing out on substantial long-term financial growth.

Key Points:

• Opportunity Loss: Opting out means forgoing tax-advantaged savings and potential employer contributions.
• Misconceptions: A startling 59% of non-contributors mistakenly believe they are already participating.

Notable Quotes:

• Bo Hanson [00:58]: "401ks are one of the most powerful tools in our financial tool belt...could literally cost them millions."
• Brian Preston [02:18]: "59% of people that don't contribute to a 401k wrongly believe that they actually are signed up and are contributing."

Case Study:

• Assumptions:
  • Median household income: $80,610
  • Contribution: 10% annually
  • Investment return: 8%
• Results:
  • Starting at 40: ~$640,000 by retirement
  • Starting at 30: Missing out on $1.5 million
  • Starting at 20: Potential $3.5 million portfolio

Action Steps:

• Brian Preston [03:21]: Encourages listeners to use resources at moneyguy.com to calculate their wealth multiplier through compounding growth.
• Bo Hanson [05:32]: Advocates for setting up automatic contributions to ensure consistent investment.

Mistake #2: Not Maximizing Employer Match

Overview:
Failing to take full advantage of employer matching contributions is akin to leaving free money on the table, significantly hindering retirement savings growth.

Key Points:

• Free Money: Employer matches provide an immediate return on investment, often up to 100% of employee contributions.
• Statistics: 22% of Americans with access to a 401(k) aren’t fully capitalizing on their employer's match.

Notable Quotes:

• Brian Preston [06:33]: "Their employer match...is free money."
• Bo Hanson [07:27]: "22% of Americans...are not getting their full employer match."

Case Study:

• Assumptions:
  • Median household income: $80,000
  • Employer match: 3%
  • Investment return: 8%
• Results:
  • Starting at 40: Missing out on ~$200,000
  • Starting at 30: Over $460,000
  • Starting at 20: Approximately $1 million

Action Steps:

• Bo Hanson [10:03]: urges listeners to understand their employer's matching formula by consulting HR or reviewing plan documents.
• Brian Preston [10:30]: Highlights the importance of prioritizing employer matches before other financial obligations like high-interest debt.

Mistake #3: Cashing Out Old 401(k)s

Overview:
With job changes, many individuals cash out their old 401(k)s, often regretting the decision years later due to lost growth opportunities and tax penalties.

Key Points:

• Behavioral Trap: The allure of immediate funds leads to premature withdrawals.
• Statistics: 41% cash out at least a portion when leaving a job, with 85% taking out the entire balance.

Notable Quotes:

• Bo Hanson [12:20]: "85% of those cashing out end up taking the entire thing."
• Brian Preston [13:41]: "If you're in your 20s or 30s... think decades away from retirement... but I need a car right now."

Case Study:

• Assumptions:
  • Investment return: 8%
  • Retirement age: 65
• Impact:
  • 40-Year-Old: Cashing out $137,000 could cost ~$1 million
  • 30-Year-Old: $61,500 withdrawal results in a $1 million shortfall
  • 20-Year-Old: Less than $30,000 withdrawal could lead to a $1 million loss

Consequences:

• Tax implications:
  • Distributions taxed as ordinary income
  • 10% penalty if under 59½

Action Steps:

• Brian Preston [17:17]: Directs listeners to moneyguy.com for resources on managing old 401(k)s.
• Bo Hanson [17:54]: Emphasizes the importance of keeping old 401(k)s invested rather than cashing out.

Mistake #4: Not Investing 401(k) Funds Properly

Overview:
Simply contributing to a 401(k) isn't enough; the way funds are invested plays a crucial role in determining the growth of retirement savings.

Key Points:

• Stagnant Investments: Leaving funds in low-yield options like cash or stable value funds can severely limit growth.
• Missed Potential: Investing in diversified equity or target retirement funds can exponentially increase portfolio value.

Notable Quotes:

• Brian Preston [18:41]: "What feels safe in the moment is actually risky in the long term."
• Bo Hanson [20:52]: "1 out of 3 rolled their savings into an IRA but left it in cash for seven years."

Case Study:

• Assumptions:
  • Conservative investment return: 2%
  • Aggressive investment return: 8%
  • Retirement age: 65
• Impact:
  • 20-Year-Old:
    • $10,000 at 2%: Grows to $25,000
    • $10,000 at 8%: Grows to $360,000
    • Difference: $337,000
  • 30-Year-Old:
    • $50,000 at 2%: Grows to $100,000
    • $50,000 at 8%: Grows to $815,000
    • Difference: $714,000
  • 40-Year-Old:
    • $200,000 at 2%: Grows to $330,000
    • $200,000 at 8%: Grows to ~$1.5 million
    • Difference: $1.1 million

Action Steps:

• Brian Preston [22:53]: Encourages understanding the importance of investment choices within the 401(k).
• Bo Hanson [22:53]: Suggests avoiding leaving funds idle and actively managing investments for higher returns.

Mistake #5: Using 401(k) as a Slush Fund (Taking out Loans)

Overview:
Taking loans from a 401(k) for personal expenses undermines long-term retirement goals by interrupting the compounding growth of investments.

Key Points:

• High Default Rates: 37% default within five years, leading to taxable distributions and penalties.
• Opportunity Cost: Funds borrowed aren’t invested, reducing overall portfolio growth.
• Interest Rates: Average loans carry interest rates between 9.5% to 10.5%, which can be costly over time.

Notable Quotes:

• Brian Preston [25:38]: "Taking 401k loans might seem like maximizing strategies, but they're actually long-term mistakes."
• Bo Hanson [27:31]: "Taking a loan removes your dollars from the market, hindering their growth."

Case Study:

• Scenario:
  • Loan Amount: $50,000
  • Interest Rate: 10%
  • Loan Term: 5 years
  • Investment Return (if not loaned): 10%
• Results:
  • With Loan: Pays back $82,000 after five years
  • Without Loan: Portfolio grows to ~$101,000
  • Difference: $18,000 over five years

Long-Term Impact:

• 20-Year Gap: $18,000 difference grows to ~$136,000
• 30-Year Gap: ~$367,000 difference
• 40-Year Gap: Nearly $1 million difference

Action Steps:

• Brian Preston [28:58]: Advises against using 401(k) loans unless absolutely necessary and suggests exploring alternative financial strategies.
• Bo Hanson [29:20]: Highlights the severe tax implications and potential penalties associated with loan defaults.

Conclusion: Steps to Optimize Your 401(k)

After outlining the five critical mistakes, Brian and Bo offer practical steps to maximize the benefits of a 401(k) plan:

1. Automate Your Investments:

   • Bo Hanson [35:10]: "Automate your investments to ensure consistent contributions without manual intervention."

2. Maximize Employer Match:

   • Brian Preston [36:19]: "Take full advantage of your employer's matching contributions to boost your retirement savings effortlessly."

3. Manage Old 401(k)s Proactively:

   • Bo Hanson [36:21]: "Have a plan for old 401(k)s when changing jobs—don't leave money behind."

4. Understand Your Investments:

   • Brian Preston [36:29]: "Know what your money is invested in and avoid overly complicated investment strategies."

5. Set and Forget:

   • Bo Hanson [36:36]: "Once your 401(k) is set up, let it work for you without constant adjustments."

Final Advice:

• Brian Preston [37:28]: Encourages listeners to leverage available resources at moneyguy.com for free content and tools to enhance their financial strategies.
• Bo Hanson [37:10]: Reinforces the importance of understanding and utilizing the full potential of 401(k) plans to secure a prosperous retirement.

Key Takeaways

• Start Early: The earlier you begin contributing, the more you benefit from compounding growth.
• Maximize Contributions: Always aim to contribute enough to receive the full employer match.
• Avoid Cashing Out: Keep old 401(k)s invested to prevent significant financial losses.
• Invest Wisely: Choose investment options that align with long-term growth rather than immediate safety.
• Be Cautious with Loans: Refrain from using 401(k) loans unless absolutely necessary, as they can derail retirement plans.

By adhering to these guidelines and avoiding common mistakes, individuals can significantly enhance their retirement savings and work towards financial independence with confidence.